The good news for medical technology companies is that they fared pretty well in the past year, despite harsh economic pressures.

The bad news? The long-standing business model for developing new medical devices is under siege, according to an industry study released this week by Ernst & Young.

First, the data: Revenue of U.S. publicly traded med-tech companies was essentially flat last year at $198 billion -- compared with $200 billion in 2008. The "slight year-over-year contraction" comes on the heels of 11 percent growth in 2008 and is the first time the U.S. industry has experienced a revenue decline since 2004, according to the report.

In the slow economy, many patients have delayed discretionary medical procedures. And hospitals -- operating on razor-thin margins -- have cut back on med-tech purchases.

Historically, doctors have largely used the medical devices they prefer. But, as the report notes, many hospitals have reduced the number of products they use, forcing physicians to choose from a smaller menu of options.

On top of that is an increasingly stringent regulatory environment, meaning it takes more money and time to win approval of new products, as well as the continued tightening of the capital markets.

These factors "are symptomatic of a fundamental shift. ...We are moving toward a future in which all companies in the health care arena ... will increasingly find themselves in the business of delivering health outcomes," the report states. Put simply, med-tech companies must prove their products work and that they do so in a cost-effective manner.

Locally, it's more of the same. With 21 publicly traded med-tech companies -- including the world's largest, Medtronic Inc. -- "Minnesota is a good microcosm for the rest of the industry in the U.S.," said Bill Miller, a partner with Ernst & Young's Minneapolis office.

Last year, net income for U.S. companies increased 4.3 percent to $7.9 billion, according to the 100-page report. In Minnesota, publicly traded companies reported $21 billion in revenue, and $3.1 billion in profit. In terms of revenue, Minnesota ranks third in the nation behind Massachusetts and California.

A few bright spots can be mined from Ernst & Young's data. Research and development -- the lifeblood of a successful med-tech industry -- increased 2.2 percent, and 5 percent in Minnesota, while U.S. employment in the industry inched up 2.8 percent. Plus, global demand for medical devices continues to grow.

Now the challenging news: The business model for developing new devices and growing promising start-up companies has fundamentally changed.

As the report notes, med-tech innovation has often been driven by iterative changes to existing products -- much like the technology industry. Med-tech has traditionally relied on venture financing to fuel new companies, a predictable regulatory and reimbursement pathway, physician interaction to inform the process, and a "symbiotic" mergers-and-acquisition environment between established companies and emerging firms.

All of those fundamentals are under siege. The Food and Drug Administration, for example, will likely make a common type of device approval called 510(k) more stringent, and there's increasing reliance in the Obama administration on comparative effectiveness research -- the principle of comparing medical interventions to determine which is the most effective -- in determining which products are reimbursed.

The report suggests med-tech companies must diversify in unorthodox ways to spread risk and tap new revenue sources. Wireless and remote monitoring technologies, for example, will likely see strong growth because of aging populations and the uptick in chronic disease, according to the report. Med-tech companies may partner with information technology companies in the future.

In addition, med-tech firms need to diversify geographically. Even now, these companies are finding fertile ground in the growing economies of countries such as China and India. "Med-tech companies are developing stripped-down versions of their products for emerging markets that do not have all the features of their latest-generation offerings but still provide effective results at a lower price-point," the report states.

According to E&Y's Miller, Minnesota companies will play a crucial part in the reinvention of the med-tech ecosystem.

"We've got the benefit of great companies based here to continue to explore alternative ways to grow and expand new product lines," he said.